Country Summary

Tunisia registered growth of 2.6% in 2013, below the official forecast (4.5%) and the 2012 level (3.7%). This slowdown can be explained by political deadlock, the worsening of the security situation, a fragile social context, stagnation in the euro area (the country’s chief client and chief supplier), and a 3.3% decline in agricultural production.

Unexpected resilience was shown by the key sectors of tourism (+2% in hard-currency revenues) and export industries (with growth of 6%), aided by the depreciation of the dinar (10% against the euro, 6.7% against the US dollar). Employment also showed timid improvement, with the unemployment rate declining to 15.7% in the third quarter of 2013 from 17 % in the same period a year earlier. Unemployment among young graduates nevertheless remains at a particularly worrisome level (34%, or one out of three), due to a widening gap between their abilities and the needs of businesses.

Growth is likely to resume in 2014 and 2015, bringing an end to the episode of recession that occurred in 2011 (-1.8%). And the current account deficit is likely to diminish in 2014 through economic recovery and the revival of tourism.

Tunisia is historically well integrated into global value chains (GVCs), notably in three industrial sectors: textiles and clothing; agro-industry; and the mechanical, electrical and electronics industries. The greatest evolution took place in the last, thanks to the development of automotive and aeronautics components, with exports progressing by an average 18% per year from 2000 to 2012. Tunisia’s three key industrial sectors account for 75% of the country’s exporting firms, and more than 65% of jobs in industry. New activities like information and communication technologies have developed recently, but their integration into GVCs has been limited to subcontracting links with limited added value, and they remain concentrated geographically along the coast. Tunisia’s integration into GVCs is being stimulated by free-trade agreements with the European Union (EU), but it is handicapped by various obstacles including trade and investment policies, the business climate, logistics, transport, regional imbalances, and technology transfers.

The banking sector is considered sound even if some improvements need to be achieved, as the Central Bank is setting up the Basel II norms.

There are 29 banks in Tunisia, of which 18 are subsidiaries of French, Kuwaiti and Qatari banks. One of these banks is an Islamic bank, Zitouna bank. The Government owns 10 of the 20 major banks.

Despite the controls of the Central Bank, several banks face increasing non-performing loans on their portfolios. Debt recovery companies have been created to buy these non-performing loans from the commercial banks.

The stock market contributes to finance, in large part, the Tunisian economy. It’s the second largest financing source, just after the banking sector. The Tunis Stock Exchange is under the control of the Capital Market Authority (Conseil des Marches Financiers – CMF). It lists 60 companies with a total market capitalization of TND 17,3 billion in 2014 compared to TND 14,09 billion in 2013. The bond market is open to the private debt instruments and the public debt instruments with maturity greater than 1 year.

Monetary policy & Public debt

The “2012 Finance Act” figured out the 2012 budget. This budget was elaborated in respect of good fiscal management principles, but also took into account the economic and social difficulties. The 2012 budget expected an economic growth of 3,5% compared to a contraction of 2% growth in 2011. The real GDP growth for 2012 was 3,6% according to the Tunisian National Institute of Statistics. The budget deficit expected for 2012 was around 6% and a rising public debt to 46%. The “2013 Finance Act” has been adopted, it is available on the Ministry of Finance website. Unfortunately, only an Arabic version is available.

The Tunisian economy began to recover in 2012, following the rebound of tourism and foreign direct investment'' that contributed to an overall increase of 3.6% compared to the contraction of 2% growth in 2011.

The budget deficit in 2012 was estimated at 5.3% of GDP (excluding grants and privatization sale of ill-gotten gains), bringing the public debt to 44% of GDP (the same level as 2011).

Monetary policy's primary mission is price stability. Through the instruments at its disposal, the Central Bank of Tunisia (BCT) fixes the money market interest rate. In addition, monetary policy decisions are based on inflation linked indicators. Despite the efforts of the Central Bank of Tunisia to maintain the inflation rate at a low level, inflationary pressure is very strong. The inflation rate was around 6% at the end of 2012. The management of this inflation requires coordination of monetary and fiscal policy that is non-existent at present.

The main objective of the Tunisian debt management strategy is the control of the public debt burden. The Tunisian authorities are trying to realize this goal at best although the political and economic difficulties do not make it easy. There is no publication of a document setting out this strategy.

The objective of the monetary policy for 2013-14 remains the controlling inflation. The Central Bank stands ready to tighten monetary policy, including further increases in the policy rate to counter rising inflationary pressures, especially if underlying inflation rises quickly.

On the 2013 fiscal policy, new measures have been adopted including an increase in consumption tax on alcoholic beverages and stamp duty combined with a recovery in economic activity would bring tax revenues to 21.8% of GDP.

The core mission of the debt management strategy is to finance the state budget at a lower cost and a lower risk in the medium and long term. The success of this goal depends on macroeconomic environment and the legal framework. The two aforementioned conditions provide favourable conditions for the development of debt management, and the ability to pursue the goal of management to a strategy of active management of the public debt, that is, taking into account the portfolio risk while continuing to reduce the cost of debt.

A summary of the report of the Tunisian public debt is available on the website of the Ministry of Finance website. Unfortunately, no report has been uploaded since 2009.

Market Structure

Instruments issued and Market participants

Instruments issued

Fungible Treasury Bonds (T-Bonds): Maturities available are equal to or greater than 2 years. Fungible means that a new issue is attaching to a Treasury bond of the same class issued previously.

Zero Coupon Treasury Bonds

Market participants

The Ministry of Finance issues Treasury instruments.

Commercial Banks dominate the Tunisian bond market. They tend to buy and hold to maturity. However, they do not act only for their own accounts but on behalf of their clients.

Investment funds are active investors in this market.

The share of foreign investors is negligible and is estimated at 0,01% (proceedings report)

Primary and Secondary Markets

Primary Markets

The amount issued in 2012 increased 13,7% to 1,52 trillion of Dinar. There are plans to issue around 1,8 trillion Dinar in 2013. The fungible T-Bonds represent 78% of the total issuances of 2012.

At end of 2012, the outstanding domestic debt reached 11,7 trillion of Dinar with an average interest rate of 4,4% and an average maturity of 7 years. The debt to GDP ratio reached 44%.

Secondary Markets

The total amount of treasury securities traded in 2012 on the secondary market was around 2,1 billion of Dinar. Only 4% of this amount was traded on the stock exchange.

Tunisian secondary bond market is illiquid and the reasons of this illiquidity are multiple. The transactions into and between the primary dealers are not executed on the stock market. This leads to a distortion in prices. Also, the authorization of banks (in addition to primary dealers) to intervene in the government securities market has gradually led to the erosion of the role of primary dealers. The banks choose to invest huge amounts in Treasury bonds adopting “Buy & Hold” strategy since the risk of default of these instruments is low.

Clearing, Settlement and Custody

The Tunisian organisation, Société Tunisienne Interprofessionnelle pour la Compensation et le Dépôt des Valeurs Mobilières (STICODEVAM) has the role of central depository and conducts the clearing and settlement of transactions. In order to meet international standards, STICODEVAM adopted the recommendations of the Group of Thirty (G-30). The G-30 is an independent international committee of experts, bankers, businessman, ministers and heads of governments. The recommendations of the G-30 were:

delivery of securities against payment of cash, the delivery of securities and payment of cash on the same day;

normalized time for the settlement of transactions (3 Hours)

cash settlements guarantee (offset in Central Bank of Tunisia) and deliveries of securities are simultaneous and irrevocable.

Protection of Investors

The Tunisian financial market has quite a number of institutions created to protect investor interest.

The Capital Market Authority (Conseil des Marches Financiers - CMF) is responsible for ensuring the protection of savings invested in securities. In this context, it provides the organization of markets and ensures their proper functioning to prevent market manipulation. It is also responsible for monitoring the financial reporting of listed financial institutions and sanctions market participants in breach or violation of market regulations.

The Guarantee Market Fund (Fonds de Garantie de Marche - FGM) was established to ensure the validity and enforceability of transactions. All brokers in the market contribute TND 1000 dinar per year towards the fund. The Tunis Stock Exchange contributes approximately 5% of its turnover.

The purpose of the FGM is to protect market participants against non-commercial risks, including the payment of money and delivery of securities following a trade or a transaction registered on the exchange.

Therefore, even in the case of failure of an intermediary, the buyer will still receive the securities and the seller the funds. The FGM replaces the failed intermediary.

Guide to Buying Bonds

Procedures for market participation

The Ministry of Finance publishes a semi-annual issuance calendar with the expected total amount for the issuances. A week before the auction, the Ministry of Finance announces the nominal amount to be auction and maturities to be issued. Treasury bond auctions are handled through the Treasury Department of the Ministry of Finance. Primary Dealers submit their bids physically in sealed envelopes on the first Tuesday of each month. If the submission date falls on a public holiday, the tenders are sent to the Ministry of Finance, within one business day prior to the submission date. The bids are opened on the first Wednesday of each month or, if applicable, the next business day after a public holiday. The Ministry of Finance groups and ranks the bids in descending order based on price. For bids at the limit price selected, the Ministry of Finance may withhold a portion of the total amount available to be distributed proportionally among the bidders in their bids.

Treasury bonds with maturities greater than one year may be traded on the Tunisian Stock Exchange (TSE). Access to the TSE requires going through a domestic broker.

Any transaction on the TSE exchange, whether a purchase or sale of shares or bonds is accompanied by transaction costs. These fees usually do not exceed 1% of the transaction amount.

The trading of securities on the stock exchange is done daily from Monday to Friday. The markets are open from 9am to 2:10 p.m.

The TSE has implemented the new version of the electronic trading system V900, aimed at enhancing surveillance, developing trading operations and increasing the capacity of the trading system. The new systems is characterized by high speed and efficiency in receiving and processing buy and sell orders, and more sophisticated coverage of long or short positions to protect against possible reversals (stop order). It is also linked to the clearing and settlement system.

Settlement cycle

Transactions on the secondary market are settled on T+1, T+2, T+3 basis. ON the Primary market, TBills follow a T+3 cycle while TBonds, T+5.

Taxation

Income from movable capital and interest is subject to a withholding tax of 20% personal income tax and corporate tax.

Rating

Rating Agency

Current rating

Outlook

Moody’s

Caa1

Stable

Fitch

B-

Negative

Standard and Poor’s

CCC+

Stable

Primary Dealers

Treasury bills were issued previously by tender exclusively for Primary Dealers (PDs) who can participate to the auction for their own account or on behalf of their clients. In addition to participating in the primary auctions, the PDs ensure their marketability of the Treasury Bills and the liquidity on the secondary market. But now, banks others than PDs can participate to the auction which lead to illiquidity of the secondary market.

Primary Dealers are selected from banks, brokers and financial institutions who are registered members of STICODEVAM. The following institutions are the designated PDs:

Market restrictions

Openness to international investors

Pursuant to the exchange regulations in force, the subscription by a foreign non-resident individual or legal body of debt securities issued by the state in Tunisia is subject to authorization of the BCT. However, the subscription and acquisition of BTA by foreigners through importing foreign currencies is permitted to a maximum rate of 20% of the biannual issuances. This rate is set by the Central Bank. The holders of these debt securities are guaranteed the transfer of their funds.

Capital control

Capital controls exist in Tunisia. Nevertheless, foreign investors can acquire shares in local firms by purchasing through local brokers who get the agreements. Foreign investors can also acquire indirect investments through local mutual funds.

Restrictions on FX and profit repatriation

The Tunisian Dinar is not a fully convertible currency, it is pegged to a basket of currencies.